2 Services Stocks with Promising Prospects and 1 We Avoid

Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. Still, investors are uneasy as firms face challenges from AI-driven disruptors and tightening corporate budgets. These doubts have certainly contributed to services stocks’ recent underperformance - over the past six months, the industry’s 9.1% gain has fallen behind the S&P 500’s 15.3% rise.

Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Keeping that in mind, here are two services stocks we think can generate sustainable market-beating returns and one that may face trouble.

One Business Services Stock to Sell:

CoreCivic (CXW)

Market Cap: $1.95 billion

Originally founded in 1983 as the first private prison company in the United States, CoreCivic (NYSE:CXW) operates correctional facilities, detention centers, and residential reentry programs for government agencies across the United States.

Why Are We Out on CXW?

1. Sluggish trends in its average available beds suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Earnings growth underperformed the sector average over the last four years as its EPS grew by just 1.9% annually
3. Free cash flow margin shrank by 9.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

CoreCivic is trading at $18.59 per share, or 14.4x forward P/E. Read our free research report to see why you should think twice about including CXW in your portfolio.

Two Business Services Stocks to Watch:

Maximus (MMS)

Market Cap: $4.61 billion

With nearly 50 years of experience translating public policy into operational programs that serve millions of citizens, Maximus (NYSE:MMS) provides operational services, clinical assessments, and technology solutions to government agencies in the U.S. and internationally.

Why Does MMS Stand Out?

1. Annual revenue growth of 9.4% over the last five years was superb and indicates its market share increased during this cycle
2. $5.43 billion in revenue allows it to spread its fixed costs across a wider base
3. Share repurchases have amplified shareholder returns as its annual earnings per share growth of 34.8% exceeded its revenue gains over the last two years

At $84.57 per share, Maximus trades at 10.4x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free for active Edge members.

Pure Storage (PSTG)

Market Cap: $23.73 billion

Founded in 2009 as a pioneer in enterprise all-flash storage technology, Pure Storage (NYSE:PSTG) provides all-flash data storage hardware and software that helps organizations manage their data more efficiently across on-premises and cloud environments.

Why Will PSTG Outperform?

1. ARR growth averaged 21.2% over the past two years, showing customers are willing to take multi-year bets on its offerings
2. Performance over the past five years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 44.3% outpaced its revenue gains
3. Strong free cash flow margin of 17% enables it to reinvest or return capital consistently, and its recently improved profitability means it has even more resources to invest or distribute

Pure Storage’s stock price of $71.90 implies a valuation ratio of 31.5x forward P/E. Is now a good time to buy? See for yourself in our comprehensive research report, it’s free for active Edge members .

Stocks We Like Even More

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